Welcome to the
fourth and final installment of the “Live at APEX” series on the official All Payments Expo Blog. The final session at this year’s conference addressed the
benefits of linking bitcoin implementation to the existing payments structure.
It focused on the market opportunities for Bitcoin in the under-served and
financial wellness categories. I would like to thank our panel, Ed Boyle (Blade), Steve Beauregard (GoCoin), Cathy Corby Iannuzzelli (Corby & Company), and our
moderator, Tim Sloane (Mercator
Advisory Group) for joining us today. It has been an amazing 3 days and I
hope you, the reader, enjoyed reading as much as I enjoyed writing.

Financial services
are costliest for the poorest individuals. In fact, “[t]he average underbanked
household has an annual income of only $25,500, yet spends
10 percent of that on fees and interest charged by the alternative
financial service sector.” To make matters worse, the number of banks in the
U.S. reached its lowest total since 1934, in 2013 and this number is continuing
to decrease. Rural areas have been hit particularly hard by these bank closures
and considering that 85 percent of the poorest counties in the U.S. are rural,
the closures disproportionately affect low-income households.

Nearly all non-debt
financial services require an initial “cash-in” in order to use the services. Many
banks require a minimum balance to open and maintain a checking account, and
failure to do so results in a penalty, thereby making opening and maintaining a
bank account prohibitively expensive for low-income households. This forces
these individuals to turn to alternative financial services, many of which
charge “an arm and a leg” to use their services. The question is whether
Bitcoin can provide the unbanked and underbanked with improved access to
financial services. The answer is YES!

As previously
discussed in, “Live
at APEX: Digitizing of Money Movement, Remittance, and P2P,” Bitcoin is
radically changing the remittance and P2P industries. This is because Bitcoin’s
cost structure fits very well within these industries. For example, traditional
remittance companies charge 8-12% per transaction, whereas a Bitcoin
transaction does not require a fee. It should be noted that to incentivize the Bitcoin
network to expedite the transaction, there is generally about a 4¢ fee. Nonetheless,
this cost savings is large enough to radically change the remittance industry.

Moreover, unlike
banks that require minimum balances, there is no minimum Bitcoin balance requirement.
In fact, the smallest amount a person can have is 0.00000001 BTC, called a
Satoshi, or approximately 0.00025 of a penny. Because a single bitcoin can be
broken down into such small amounts, it can be used to conduct transactions in
U.S. dollars, as well as in Tanzanian shilings. This has important implications
for remittances and P2P payments because anyone can send value to anywhere in
the world, without having to rely on a third party intermediary.

Cross-border
transactions can require up to seven intermediaries before they are completed;
Bitcoin requires zero. Not only do these intermediaries add to the cost that is
borne by customers, but the process is also very time-consuming. This is a
reason why companies such as Money Gram and Western Union are able to charge
such high fees for remittances; they speed up the process. Their services are
still slower, more expensive, and generally less convenient than Bitcoin. They
do however solve the “last
mile problem,” which is something that Bitcoin has not yet solved. While it
is easy to send and receive Bitcoin, only a small number of merchants accept it
and it may be difficult to convert into fiat currency, but this is changing.

More than $100
million in venture capital was invested in Bitcoin companies this past year.
Companies, such as Ripple Labs and Circle Financial are designing solutions to
solve the last mile problem. There has also been significant investment in
Bitcoin ATM companies to make it easier to obtain bitcoin (find one near you). Plenty
of other areas along the supply chain have also been invested in and are
currently being worked on.

Although we are not
there yet, by linking Bitcoin implementation to the existing payments structure
and decreasing costs, the lives of hundreds of millions of unbanked and
underbanked individuals around the world will be improved by giving them access
to inexpensive financial services. It does not however end with remittances and
P2P payments. E-mail was the first application of the Internet and services
such as Netflix were previously inconceivable. A digital currency is only the
first application of Bitcoin. The next one is just waiting to be conceived.

Matt Gertler is the Head of Strategy at the Digital Currency Council
(“DCC”) and is pursuing his JD/MBA at USC. He is experienced in FinTech, having
worked for Venmo, Braintree Payment Solutions, and Earnest before joining the
DCC.

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Wednesday, February 25, 2015

Welcome back to the
official All Payments Expo Blog. We just wrapped up the “Omnichannel Forum: Exploring the Right
Bitcoin Application for Retailers.” The forum addressed how technological
innovation will change the face of retail by considering the latest experiments
in point-of-sale (“POS”), loyalty, and gift card applications. I would like to
thank our panel, Brad Chun (TechCafé), Judd
Bagley (Overstock.com), and Sony Singh
(Bitpay), and our moderator, Steve Beauregard
(GoCoin) for joining us today.

POS transactions are
going to undergo a massive overhaul in the coming years. Beginning in October
2015, merchants that do not switch to the Europay-MasterCard-Visa (EMV) chip
standard will be liable for any resulting credit fraud. This is coinciding with
a switch from Windows XP based systems to cloud based POS solutions. A
significant benefit of storing the system on the cloud is that it is much
easier to change or add more functionality. For example, if the system is
stored in the cloud, merchants can begin accepting Bitcoin almost immediately. Such
a change previously would have required getting new hardware if not completely
replacing the old system.

But why would a
retailer want to accept bitcoin? Traditional payment processors charge 2-3%
whereas bitcoin merchant service providers provide this service for 1%. This
does not take into account credit fraud, which increases the 2-3% cost to
merchants. Bitcoin is also fully secure, so there is no concern for many credit
frauds, such as charge backs. Additionally, Bagley shared statistics from
Overstock, showing that the average Bitcoin transaction is three-times greater
than the average USD transaction. He suggested that Overstock’s most loyal
customers are those that pay in Bitcoin.

Once the EMV
standard is implemented, the new POS systems will be NFC-enabled. This will allow
retailers to accept mobile payments such as Apple Pay and Google Wallet. When
you consider beaconing and push notifications alongside these new payment
methods, retailers can interact with customers in new ways. Communication does
not end when customers leave the store, but may be triggered when they or near
it, or even at home when watching a retailer’s commercial. While the last idea
might only be an idea currently, it is not a stretch of the imagination that
future generation televisions will have the capability to share this
information.

Bill Ready (PayPal) explains
the importance of mobile in the retail space is that consumers are looking to
fill spare moments throughout the day with their mobile devices. He says that
“if a retailer can get an app on a consumer’s phone, [it has a] tremendous
opportunity to interact with that consumer,” regardless of the customer’s
location. This allows retailers to create contextualized experiences tailored
to individual customers. Presumably this will increase sales. Considering that
both Apple Pay and Google Wallet still rely on the credit card networks, and still
suffer with the same 2-3% processing fee, the question remains of how Bitcoin
can be implemented alongside a mobile strategy.

We are probably
still a few years away. Ideally, customers would be able to link a debit or
credit card to a Bitcoin wallet and behind the scenes have the payment
processor convert the USD into Bitcoin seamlessly. While we are not quite there
yet, Xapo has created a Bitcoin debit card that
may solve this problem. However, it is currently in beta testing and not
available in the U.S. or India. A solution that is available in the U.S. is
provided by one of our sponsors, Gyft. Gyft
purchases gift cards as a wholesaler and resells them to its customers. While
they can pay by credit card or Bitcoin, customers are encouraged to pay by
Bitcoin by being offered an extra 3% in reward points because there are no
transaction fees. A Forbes
article explains how this method was vital in the author only paying in
Bitcoin for a week.

Matt Gertler is the Head of Strategy at the Digital Currency Council
(“DCC”) and is pursuing his JD/MBA at USC. He is experienced in FinTech, having
worked for Venmo, Braintree Payment Solutions, and Earnest before joining the
DCC. If you have any questions, please tweet @magertler using, #APEXLV15, and
they may be included in a future post.

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Welcome back to the
official All Payments Expo Blog. We recently concluded the “Disruptive Technology Forum:
Digitizing of Money Movement, Remittance, & P2P.” The forum centered on the
many changes that are occurring in the movement of money, from new rules and
regulations to an influx of non-traditional, online players. I would like to
thank our panel, Tammi Shapiro (Fiserv),
Ajay Hans (Mobetize, Corp.), and Peter Kelly
(ABRA), and our moderator, Robert
Courtneidge (Locke Lord) for joining us
today. Their insight and expertise greatly simplified a very complicated and
rapidly changing ecosystem.

In an APEX podcast, Rik
Willard (MintCombine)
suggests that Bitcoin and other alternative financial services are potential
category killers in remittances. He gives the example of Mpesa,
a service that allows people to transfer money throughout Kenya almost
instantaneously and inexpensively. For example, there is a 12% transaction fee
to transfer money from the U.K. to Kenya with conventional remittance
companies, whereas there is only a 3% fee with Mpesa. Seeing as 90% of Kenyans
are unbanked, but 80% of Kenyans have mobile phones, Mpesa and other similar
financial services are radically changing the remittance industry.

Still, services such
as Mpesa charge a 3% fee and Bitcoin, as well as other alternative financial
services offer means to transfer value at a near-zero cost. One such service is
Venmo, which allows two individuals to send money to one another, called
person-to-person (“P2P”) payments. There is no fee if the money originates from
the user’s bank account or debit card, but there is still a 3% fee for using a
credit card. Meanwhile, companies such as Circle Financial and Ripple Labs are
attempting to change this by developing platforms based on the Bitcoin system
that enable the transfer of money anywhere in the world for pennies, if not for
free. This is in contrast to Venmo, which is currently limited to people
residing in the U.S.

Seeing as Bitcoin and
other alternative financial services improve upon a number of deficiencies in how
we currently move money, it is not surprising that banks are studying Bitcoin
intensively. In fact, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs
and Wells Fargo have all published reports on Bitcoin for their customers. Bank
of America reported that Bitcoin may emerge as a serious competitor to
traditional money-transfer providers. Still, Bitcoin cannot be massively
adopted until there is further regulatory clarification. Barry Silbert (SecondMarket)
explains
that “banks are waiting for clearer guidance at the federal level on how
businesses are having interactions with bitcoin,” in addition to other state
regulatory concerns.

DISCLOSURE: What follows is a summary of important legal and regulatory
issues, but it does not cover every legal or regulatory issue. You should always
consult counsel. If you would like to find a certified digital currency
attorney, you can check the member directory at the
Digital Currency Council.

At the federal
level, the Financial Crimes Enforcement Network (“FinCEN”) imposes certain
requirements on money service businesses (“MSB”). A business may be considered
a MSB if it offers any of the following products and services: money orders,
traveler’s checks, money transmission, check cashing, currency exchange,
currency dealing, and prepaid access. The regulations require MSBs to ensure that
their services are not being used for nefarious activities and requires that these
companies: file Suspicious Activities Reports, implement an anti-money
laundering (“AML”) program, and check customers against OFAC’s Specially
Designated Nationals List, in addition to a number of other requirements.

Because Bitcoin is pseudo-anonymous, it
is not known who the real-identities of the parties to the transaction are,
only their Bitcoin addresses. This is a major reason why banks were initially
hesitant to engage with Bitcoin: they are worried that they will be punished
for not getting sufficient information about their customers. Bitcoin companies
are beginning to find ways to obtain this information from customers, which has
led to banks beginning to partner with Bitcoin companies. There is still a long
way to go. For example, because of U.S. regulations, Bitcoin wallet, Xapo, is
unable to offer its debit card product in the U.S. until it can find a banking
partner.

This lack of clarity
also exists at the state level. Whereas states such as North Carolina and Texas
regulate Bitcoin Companies within their existing money transmitter laws, states
such as New York are attempting to create an entirely new type of license,
coined the “BitLicense.” The BitLicense is highly controversial as some welcome
clarity while others point out that Bitcoin is a technology and not something
that should be regulated. The proposed BitLicense is currently undergoing its
second iteration, with New York welcoming comments on the proposal until March
6, 2015. You can read the most recent proposed regulations here.

Matt Gertler is the Head of Strategy at the Digital Currency Council
(“DCC”) and is pursuing his JD/MBA at USC. He is experienced in FinTech, having
worked for Venmo, Braintree Payment Solutions, and Earnest before joining the
DCC. If you have any questions, please tweet @magertler using, #APEXLV15, and
they may be included in a future post.

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Tuesday, February 24, 2015

Welcome to the
official All Payments
Expo Blog. The purpose of the “Live at APEX” series is to
highlight the key takeaways from this year’s panels in a manner that is both
informative and enjoyable, even if you were unable to attend this year. If you
have any questions that you would like answered in a future post, tweet me
@magertler using, #APEXLV15.

We just wrapped up
the “Knowing the Unknowable: Payment Predictions” panel. While it is impossible
to know the future, our panel of payments experts, Stefan Happ (American Express), Jack Stephenson
(First Data), and Amir
Wain (i2c) did an awesome job explaining
what they think the payments ecosystem is going to look like in the not-to-distant
future. I would like to thank them and our moderator, Matt Harris (Bain Capital Ventures) for
joining us today.

What impact does Bitcoin have on the existing payments infrastructure?

Bitcoin is a technological
innovation that will radically change the existing payments infrastructure. Bitcoin
solved the Byzantine Generals’ Problem, which is a computer science problem
that asks how trust can be established between two unrelated parties over an unsecured
network, such as the Internet. Bitcoin offers the first practical solution to
this problem in that it allows for the
safe, secure, and permanent transfer of ownership in digital property at a
near-zero cost. Accordingly, Bitcoin offers a potential alternative to
conventional payment processers that charge merchants 2-3% in fees.

Fraud is the biggest
reason that payment processors charge these fees. During an earlier APEX
workshop, Rich Stuppy (Kount) reported that
there were more than 1500 data breaches in 2014 and 76 percent of them occurred
in the United States. This “perfect storm of fraud” is increasing as mobile
payments become more ubiquitous. M-commerce makes up a disproportionate share
of credit fraud relative to its share of transactions. In fact, a Jan. 25, 2015
survey
by LexisNexis Risk Solutions found that “mobile payments account for 14 percent
of transactions among merchants who accept them, [but] make up 21 percent of
fraud cases.”

Bitcoin can prevent fraud.In his, “Why
Bitcoin Matters” article, Marc Andreessen (Andreessen
Horowitz) offers an example of how Bitcoin could have made the “Target hack”
impossible. He writes:

“You fill your cart and go to the checkout
station like you do now. But instead of handing over your credit card to pay,
you pull out your smartphone and take a snapshot of a QR code displayed on the
cash register. The QR code contains all the information required for you to
send Bitcoin to Target, including the amount. You click “Confirm” on your phone
and the transaction is done (including converting dollars from your account
into Bitcoin, even if you did not own any Bitcoin).”

A third impact that
Bitcoin will have on payments is that “micropayments” will offer new
monetization options for companies. Micropayments are transactions that involve
payments between about 75 cents and a fraction of a penny. They have never before
been practical because conventional payment system fees are too expensive for such
small amounts. Since Bitcoin is divisible to the eighth decimal point, it
provides a practical way to transfer values as small as fractions of pennies. For
example, this offers content producers a new way to monetize their content, rather
than having to rely on traditional subscription and advertising methods.

What current crazes will be irrelevant in 5 years?

There is a current
craze of characterizing payments based on the device being used to conduct the
transaction. We use terms such as point-of-sale (“POS”), e-commerce, and
m-commerce; but, this is going to change. The lines between POS and mobile are
being blurred, and they will continue to blur further. For example, eating at a
restaurant has traditionally been considered POS, but OpenTable allows people
to not only make reservations, but also pay for the meal via the app. Other
companies, such as Lyft, Starbucks, and Subway are all changing the purchase
experience.

The likely
trajectory of this is that all types of payments will be streamlined. It is not
hard to picture a future where you can go to a market, fill up your cart, type
a few buttons on your phone, and leave (or maybe you will not even need to take
out your phone). Monday’s keynote speaker, Jim McKelvey (Square) suggested that “Indoor Location
Services” will allow for the streamline of payments in retail establishments
and the technology is only a year or two away from becoming “good enough” to be
mass adopted. He suggests that many retailers are not adopting now, thinking
they have time to do it later. The risk of this is that a market-leading
retailer (e.g. Barnes and Noble, Blockbuster) may wake up and realize that all
of their customers switched to a competitor offering a better service (e.g.
Amazon, Netflix).

What will the mobile operating systems (Apple, Android) bring to the
table?

Mobile operating
systems are going to radically change POS transactions. Both Apple Pay and Google Wallet work at retail
establishments that have NFC-enabled POS systems. This is a total of only
220,000 merchants, or less
than 3% of the market. The number of merchants is expected to significantly
increase this year with the upcoming October 2015 deadline requiring merchants
to convert from magnetic-stripe payment cards to the Europay-MasterCard-Visa
(EMV) chip card standard. A merchant that cannot accept NFC payments after this
date will be liable for any resulting credit fraud.

Another potential
product from Google is a POS system named “Plaso,”
which is currently being tested by Google employees. It leverages the Android
platform to notify retailers when a Plaso-enabled device enters an
establishment. Customers pay for goods and services at checkout by giving their
initials to the checkout clerk. While there is no guarantee that Plaso will
ever be released to the public, it is clear that mobile is changing how we pay
for goods and services.

Mobile operating
systems allow us to interact with our environment. While today this is somewhat
limited to smartphones, in the coming years, “mobile” will include wearables.
Samsung is already in the market and has its own operating system, “Tizen.” As
wearables take new forms and are adopted, it is likely that new mobile
operating systems will emerge that enable these devices to perform previously
impossible things.

Matt Gertler is the Head of Strategy at the Digital Currency Council
(“DCC”) and is pursuing his JD/MBA at USC. He is experienced in FinTech, having
worked for Venmo, Braintree Payment Solutions, and Earnest before joining the DCC.
If you have any questions, please tweet @magertler using, #APEXLV15, and they
may be included in a future post.

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